Why Retail Clinics Failed to Transform Health Care

When retail clinics entered the U.S. health care market more than a decade ago, they were greeted with high expectations. The hope was their lower cost structure and focus on convenience and price transparency — two things sorely lacking in traditional health care — would engender radical changes. Retail clinics have demonstrated that they are a sustainable business model and clearly fit a patient need: Today, there are more than 1,600 clinics across the country, which have had a total of 20 million patient visits. Nonetheless, their performance has been disappointing: Their growth has been less than expected, they have not expanded care to underserved markets (namely, the poor), and their impact on health care spending — helping to lower it — remains unclear.

Understanding their disappointing performance is particularly important given that retail clinics are viewed as the prototypical example of how disruptive innovation can change the health care system for the better. The idea of disruptive innovation, a concept pioneered by the Harvard Business School’s Clayton Christensen and written about previously in HBR and in a book that one of us co-authored, is that industries are more commonly transformed by new entrants, rather than entrenched players. Disruptive companies get their start by offering affordability, convenience, and simplicity to previously neglected market segments that are too small and low margin for incumbents to pursue or aggressively defend.

Retail clinics fit this description to a tee. Because they employ nurse practitioners rather than physicians and offer care in locations such as pharmacies and grocery stores, retail clinics can provide services at a lower cost per encounter than traditional medical practices. In addition to lower cost, convenience has also been a key attraction, since patients are not required to make appointments and the clinics are often co-located with pharmacies. Most important, by focusing on a narrow set of simple medical conditions (10 conditions — including immunizations, strep throat, and ear infections — account for 90% of visits), retail clinics can deliver care that is equal in quality to that offered by incumbent providers.

Stalled Growth

Today, retail clinics nationwide receive roughly 6 million visits per year. However, the growth in the number of clinics has now plateaued, and they still account for less than 5% of the 100 million outpatient visits to physicians’ offices and emergency departments for simple acute conditions such as sinusitis and urinary tract infection, a number we might have expected to be higher by this point.

The disruptive-innovation model predicts that retail clinics would garner an initial following among “nonconsumers” — especially those without health insurance or who live in communities not adequately served by incumbent institutions. However, the convenience of retail clinics has been a selling point primarily in higher-income communities, where patients have health insurance and access to a physician. Although retail clinics are more affordable than physician practices, they have not been effective in attracting the largest population of nonconsumers: the poor, who paradoxically continue to rely on costlier sources of care such as emergency departments.

Reasons for the Limited Impact

The disappointing performance of retail clinics can be attributed to some perversities in regulations and reimbursement in the current health care system. First, the expectation based on the disruptive innovation model was that traditional providers would view the simple acute problems treated at retail clinics as low-margin services they would give up. However, due to a disconnect between reimbursement and actual costs of care, these incumbent providers view simple acute problems as high-margin work that offsets the losses from caring for more complex problems.

Second, these clinics are often staffed by nurse practitioners. But regulatory limitations on nursing scope of practice, which vary significantly from state to state, and regulation that fixes reimbursement to nurse practitioners at 85% of physician reimbursement for providing the same care, have impeded more rapid expansion of retail clinics.

Third, due to antiquated payment models, Medicaid plans that serve the poor have been reluctant to cover care in retail clinics and therefore shun the very market segment that may benefit the most from the convenience of retail clinics. Ultimately, as long as the U.S. health care system is driven by an administered payment schedule that bears little relation to the actual cost of care and allows some services to offset the costs of others, this system will always be prone to market irrationalities.

In summary, retail clinics exemplify both the potential of and challenges for disruptive innovators to improve value in health care. But clearly, the impact of such disruptive innovations will be limited unless the regulatory and reimbursement barriers are dismantled.